Although the intensity of movements in the exchange rate of the kuna decreased in the past few days, the Council of the Croatian National Bank believes that the central bank should send a clear signal to the markets that it is not going to give up the decisive defense of the stability of prices and the national currency, since this is the central bank's fundamental task. Therefore, the stability of prices and the kuna will be defended with all instruments of monetary policy that the central bank has at its disposal. Taking into consideration the aforementioned, at its meeting held on Wednesday, March 10, 1999, the Council of the Croatian National Bank, chaired by Governor dr. Marko Skreb, decided to increase the mandatory reserve ratio for one percentage point (from 29.5 to 30.5 percent) as of March 15, 1999, and to raise the Lombard rate from 12 to 13 percent.

By applying these, the Council presumes, temporary measures the CNB aims at withdrawing a portion of liquid assets used for financing the speculative foreign exchange purchases exceeding the real demand for foreign exchange currency used for making import payments and repayment of matured foreign exchange loans. The created foreign exchange demand enhances expectations of further depreciation of the kuna, which exerts additional pressure on the exchange rate. Thus, the CNB Council believes that the additional measures, along with interventions of the central bank on the foreign exchange market, should be used to signal clearly that the central bank is determined to preserve the stability of the kuna and keep the exchange rate fluctuations within the acceptable band. The Council believes that these measures will suffice to bridge the period until the expected seasonal increase of the foreign exchange supply. However, should it prove necessary, the central bank may put to use a number of other monetary policy instruments.

The Council of the CNB expects that adequate measures of fiscal and other economic policies will be applied soon for the purpose of preserving the macroeconomic stability which was difficult to achieve and is a precondition of a sound economic growth. The Council of the CNB wishes to emphasize that the desired stability was attained and preserved in the past few years precisely due to the coordinated implementation of all these policies. It is therefore necessary to continue with the implementation of these policies, taking into consideration the fact that bitter experience of Croatian citizens with inflation and devaluation of the national currency in the past make them extremely sensitive to every significant move in the exchange rate or prices. An evidence of this sensitivity is the fact that recent movements in the exchange rate of the kuna caused an over-reaction of citizens, enterprises and banks, although the relation between the kuna and the German mark changed during the whole 1998 and the past period of this year approximately as much as the relation between the American dollar and the euro from the beginning of 1999 until now.

The Council of the Croatian National Bank was informed that the temporary administrators appointed to Komercijalna banka Zagreb, Zupanjska banka Zupanja and Gradska banka Osijek had completed their reports on the situation in the respective banks and submitted them to the CNB within the legally prescribed period of 45 days. Pursuant to the regulation, the Council of the CNB will discuss these reports in the coming two weeks.